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2025 (7) TMI 1688 - AT - Income TaxNature of expenditure - software expenditure - revenue v/s capital expenditure - HELD THAT - It is not in dispute that the assessee had separately capitalised hardware purchases and the expenditure in question pertained only to software licences and renewals used in day-to-day business operations. CIT(A) s finding that the expenditure related to operating software used in routine inventory and quality control processes and did not result in acquisition of any capital asset or enduring advantage remains unrebutted by the Revenue. Revenue has also not pointed out any specific item falling under the disallowed head that contradicts this finding. As noted the judicial precedent relied on in case of Danfos Industries 2021 (9) TMI 1151 - MADRAS HIGH COURT where it was decided that a license which is valid for one year and did not confer any enduring benefit expenditure incurred in acquiring such software license is revenue in nature - Thus expenditure incurred on application software or renewal of licences in the ordinary course of business is revenue in nature we see no infirmity in the order of the CIT(A) allowing the claim. This ground of appeal raised by the Revenue is therefore dismissed. Disallowance of interest expenditure - attributing a notional proportion of interest towards capital work-in-progress and capital advances - CIT(A) deleted addition - HELD THAT - It is not in dispute that the Assessing Officer has not established any direct nexus between the borrowed funds and the capital assets or advances. The disallowance has been made solely on a presumptive basis by applying a notional allocation formula. CIT(A) after examining the assessee s submissions and financial position has given a categorical finding that the assessee had sufficient own funds amounting to Rs. 51.48 crores as on 31.03.2016 comprising share capital reserves and surplus whereas the capital work-in-progress and capital advances aggregated to Rs. 26.38 crores. CIT(A) also accepted the assessee s contention that the borrowings were primarily utilised for repayment of old trade liabilities and general business operations and that there was no evidence to suggest diversion for capital purposes. These findings are not controverted by the Revenue by bringing any positive material on record. CIT(A) has rightly relied upon the settled legal position laid down Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein it has been held that if the assessee possesses both interest-free funds and interest-bearing borrowed funds and the interest-free funds are sufficient to meet the investments a presumption arises that the investments are made out of interest-free funds. This principle has been consistently followed in subsequent decisions of various judicial authorities and is squarely applicable to the present case. Decided against revenue. Disallowance of Consultancy Fee - revenue v/s capital expenditure - assessee submitted that the consultancy services primarily related to technical documentation dossier preparation on-site audit assistance and compliance facilitation which are recurring and integral to the export operations of a pharmaceutical enterprise and it was asserted did not result in the creation of any tangible or intangible asset nor did it bring about an enduring advantage in the capital field - HELD THAT - DR despite raising general objections could not bring on record any tangible material or fact to controvert the above position. No evidence has been placed before us to show that the expenditure led to acquisition of any capital asset or that the approvals obtained resulted in enduring benefit in the capital field. Thus we hold that the expenditure incurred by the assessee was revenue in nature incurred wholly and exclusively for the purposes of business and is therefore allowable under section 37(1) of the Income-tax Act. Decided in favour of assessee. Disallowance of Foreign Exchange Fluctuation Loss - core argument advanced by the learned AR is that section 43A applies only when the payment is made after the acquisition of the asset and not when advances are made prior to acquisition - HELD THAT - The term towards the whole or a part of the cost of the asset appearing in clause (a) of section 43A clearly contemplates situations where payments including advance payments are made in relation to the cost of acquisition of a capital asset. The fluctuation in the rate of exchange if resulting in an increase or reduction in such liability at the time of making payment is required to be added to or deducted from the actual cost of the asset irrespective of the method of accounting adopted by the assessee. In the present case the assessee has not disputed that the payments were made as advances for acquisition of capital goods. The change in exchange rate during the relevant previous year has impacted the liability in Indian currency at the time of such payments. It is also not the case of the assessee that the capital goods so ordered were not eventually acquired. Therefore even though the payments were made before booking the assets in the books of account they were clearly towards the cost of the asset and hence fall within the ambit of clause (a) to section 43A. As in Woodward Governor India Pvt. Ltd 2009 (4) TMI 4 - SUPREME COURT has laid down the principle that exchange fluctuation loss is to be treated in accordance with the nature of the underlying liability. In cases where the liability pertains to acquisition of capital assets from outside India such exchange difference is capital in nature and not allowable under section 37(1). The Court further held that accounting entries based on Accounting Standard-11 cannot override the specific mandate of section 43A. AR could not place on record any specific evidence or material to demonstrate the timing of acquisition of the capital assets vis- -vis the payment of advance nor was any documentary evidence produced to establish that the fluctuation loss was not relatable to capital goods. In the absence of such details and in view of the admitted position that the payments were made for capital assets the assessee s reliance on the distinction between pre- and post-acquisition payments is misplaced. Thus no infirmity in the conclusion drawn by the learned CIT(A) that the foreign exchange fluctuation loss debited to the profit and loss account being relatable to acquisition of capital assets is capital in nature and liable to be capitalised u/s 43A. The direction issued by the CIT(A) to restrict the disallowance being the actual amount debited to the profit and loss account is also fair and reasonable. ISSUES:
RULINGS / HOLDINGS:
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